OBG talks to Prime Minister N. Altankhuyag

Interview: Prime Minister N. Altankhuyag

What are the government’s current priorities in terms of economic development, and how can Mongolia move beyond minerals and mining?

PRIME MINISTER N. ALTANKHUYAG: The new government is focusing on three main priorities. The very first is to create jobs for the Mongolia people, for which we have created a separate Ministry of Labour. The second one is to fight corruption and tackle the state bureaucracy as well as increasing the accountability in all sectors. All the public service entities will need to be more open and transparent, the same goes for new tenders for upcoming projects. We now have a legal framework in place to penalise/punish wrongdoing. In 2012 we already had several successful prosecutions of corrupt personnel, which clearly shows the will behind the new government to change things.

The third priority is to focus on upcoming mega-projects. The mining industry has been growing significantly in Mongolia in recent years and it will take an even bigger portion of our exports structure in the near future. This is the reason why the current government’s action plan mainly focuses on the issue of diversifying the country’s economy. The traditional economic sector is animal farming and agriculture, so the government will continuously focus on the export of not only mineral resources, but will also devote attention to the increase the processing industry. Oil refining, the copper and steel, as well as coking and chemical industries have a lot of potential for development too.

Among the main targets for completion of those mega-projects is Oyu Tolgoi, which will start operations soon. Already the project has seen an investment of $4bn-5bn. Furthermore, to decrease the export costs of minerals we are also planning to develop a new railway project, at an estimated cost of $5bn. The country’s geography is widely spread, with 21 provinces, 12 of those are not connected to Ulaanbaatar via paved road yet, so the connection of those will be an additional priority. We also have a large-scale housing project currently under way, mainly focused on serving the needs of the younger, lower-income population. Apart from that, we are focusing on the establishment of new economic centres outside of the capital city to lower the current migration towards Ulaanbaatar and create greater employment in the other existing cities, including building modern hospitals and schools.

In which sectors would you like to see greater participation by foreign investors?

ALTANKHUYAG: Investment opportunities in infrastructure projects are wide open for foreign investors.

The $5bn railway project, for example, will be 51% financed by the government, with the remaining sum coming from foreign investors. There are also opportunities in the energy sector. Given size and location of Mongolia, we certainly have the opportunity to become an energy exporter. The long-lasting partnership with our neighbours, Russia and China, will continue in the future, and we are looking forward to a multi-pillar foreign relationship with others as well.

How does the current legal framework need to be changed to facilitate investment, specifically with regard to the new strategic sector law?

ALTANKHUYAG: We have identified three major industries as strategic: the mineral sector, banking and finance, and telecommunications. This law is not against foreign investment; rather it is about registering and allowing foreign investment. If, in those sectors, the investor wants to own more than 49%, it will require permission by the parliament. This process has been misinterpreted by several investors. It is not about blocking investment; it is simply about getting the permission. The law is meant to provide for equal opportunities, for both the multinational corporation and the government. I think that the doubt and reservation of foreign investors is due to the fact that we had very little time to talk to foreign investors while drafting the legislation. If a mining company wants to sell a larger amount of shares to another international company they will solely have to ask for permission, which is nothing new compared to many other countries in the world. We do, however, see the need for changes in two areas. Currently, the amount of foreign investment exceeds MNT100bn ($71.43m) the same procedure will apply and the parliament needs to approve beforehand. The first change needs to be an increase in the amount of minimum investment, which requires permission. This number might be too low and we need to discuss the benchmark. Additionally, the permission process might also need to be revised, as many people perceive it as a blocking mechanism towards foreign investment. Other laws set to be changed are the petroleum law, which is due to be amended within the next three years, and the securities law. The government is working actively to create the basis for a future “rainbow economy” in which mining revenues will primarily create the basis for investment in those other sectors.

How do you plan to address the lack of available capital needed to complete new mega-projects?

ALTANKHUYAG: Approximately $5bn-10bn will come from the government side, amounting to a 51% share of the main projects, whereas the remaining capital will be raised by investors. We also intend to release a government bond. The majority of projects will commence in 2013 and we expect additional investment of around $1.5bn. The funding sources for projects related to small and medium-sized enterprises (SME) will also be enhanced to in excess of MNT5bn ($3.57m), from a current level that is only MNT400m ($285,714). In order to create more jobs at the SME level, those entities whose revenue is below MNT1.5bn ($1.07m), will get a refund of 90% of their paid income tax.

Your government wants to renegotiate some key mining contracts such as Oyu Tolgoi, what is the risk of this process deterring foreign investors?

ALTANKHUYAG: The government is actively discussing the issue with Oyu Tolgoi and we have a joint understanding of what we are going to do. We need to work on several clarifications of the investment agreement, and we are confident the revision will soon be successfully implemented. This will certainly have a positive impact on additional foreign investment flowing into the country, not only in mining, but other sectors as well. The government is not intending to change investment agreements entirely or partially. Instead we want to revise the implementation of the signed agreement. We will reconsider several aspects of the agreement, specifically the initial investment, which is a major component of the agreement, and meant to be $4.7bn. In fact, the initial investment has risen to $7.1bn. What does this mean for us? It means that the amount of the government’s credit increases. However, it is stipulated in the agreement that should the amount of the initial investment change, it will have an impact on the feasibility study and it will affect the interest of the shareholder parties, so there is room for revision.

What are the government’s budget proposal plans for 2013 with regards to a cut in spending?

ALTANKHUYAG: The budget stipulates that the deficit should not exceed 2% of GDP, although it actually pointed at a needed increase of around 35%. So we must ask ourselves: is there any possibility of doing so, and if so, why? The 2013 budget offers a number of justifications. First, it does not contain every policy stipulated by the government, but it reflects some of the previous government’s programmes. Nevertheless, we are aiming to hold expenditure to within 2% of GDP, and are searching for channels to increase revenue.

How is the government investing in education?

ALTANKHUYAG: We are committed to improving education, in particular the sciences. The system is perceived as an old model that needs to be adapted to today’s environment. Primary education will receive key attention, along with vocational education and technical universities, to better meet the demands of industry.